Canadians aren’t just buying real estate, they’re also treating themselves to new cars. According to a new release from Statistics Canada, sales of new cars reached a record high for February. Great for automobile manufacturers, but not so great for the economy. Debt-fuelled financing makes this more of a warning sign than a boom-time trend.
New Vehicle Sales In Canada Reach Record Highs
Sales of new motor vehicles across Canada rose to an all-time record for February. The month saw 125,284 sales – a 2.74% increase from the same time last year. The largest segment of sales were seen in Ontario, where 41% of them occurred. This is up slightly from 2016, where Ontario accounted for 39% of sales. Booming real estate prices, and massive numbers for car sales… Ontario better be facing the greatest economy its ever experienced, or it’s in trouble.
Source: Statistics Canada.
Average Sale Price For New Vehicles Rises
Consumers are purchasing more expensive vehicles too. Over $5 billion was spent on new vehicles for the month, bringing the average to $40,100 – up 3.4% from the same time last year. Ontario was below the average for the country, where the average price was $39,400. While prices are lower in Ontario, they’re not exactly budget vehicles either.
Source: Statistics Canada.
Consumers Are Buying “More Car Than They Can Afford”
The uptick in average sale price is due to longer financing terms for buyers. According to the Financial Consumer Agency of Canada (FCAC), Canadians are “increasingly purchasing more car that they can afford,” due to longer financing becoming fashionable. The agency notes that average leases have crept up 2 months, every year since 2010. According to the Bank of Canada (BoC), the average loan was 74 months as of 2015. Longer terms bring down monthly payments, but increases the total cost of the loan.
The Rise of Non-Prime Lending In The Auto Industry
The right to debt seems to be a topic all Canadians are embracing, and the auto sector is no different. The BoC has estimated that 25% of borrowers are non-prime, which incase you didn’t know is Canadian-English for “sub-prime.” These buyers generally have a FICO score below 670, and face predatory loans with up to 25% interest. This makes it difficult to build positive equity on car loans.
The boom of vehicle sales should be an indicator of a healthy economy, but is actually a drag due to the dependence on credit. Increasingly Canadian consumers are turning to sub-prime borrowing to meet their financial needs. The immediate boost is nothing compared to the problems created. More long term debt means a greater percentage of income devoted to debt-service.
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Photo via GoToVan.